Envista Holdings Corp (NVST) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Management’s Discussion and Analysis of Financial Condition and Results of Operations of our business is designed to provide a reader of our financial statements with a narrative from the perspective of management. You should read the following discussion in conjunction with the sections entitled “Envista Holdings Corporation Audited Consolidated and Combined Financial Statements” included in this Annual Report on Form 10-K. Management’s Discussion and Analysis of Financial Condition and Results of Operations is divided into seven sections:
◦Basis of Presentation
◦Overview
◦Results of Operations
◦Liquidity and Capital Resources
◦Qualitative and Quantitative Disclosures About Market Risk
◦Critical Accounting Estimates
◦New Accounting Standards
BASIS OF PRESENTATION
The accompanying consolidated and combined financial statements present our historical financial position, results of operations, changes in equity and cash flows in accordance with accounting principles generally accepted in the United States (“GAAP”). The consolidated and combined financial statements for periods prior to the Separation were derived from Danaher’s consolidated financial statements and accounting records and prepared in accordance with GAAP for the preparation of carved-out combined financial statements. Through the date of the Separation, all revenues and costs as well as assets and liabilities directly associated with our business have been included in the consolidated and combined financial statements. Prior to the Separation, our consolidated and combined financial statements also included allocations of certain general, administrative, sales and marketing expenses and cost of sales from Danaher’s corporate office and from other Danaher businesses to us and allocations of related assets, liabilities, and Danaher’s investment, as applicable. The allocations were determined on a reasonable basis; however, the amounts are not necessarily representative of the amounts that would have been reflected in the financial statements had we been an entity that operated independently of Danaher during the applicable periods. Related party allocations prior to the Separation, including the method for such allocation, are discussed further in Note 24 to our audited consolidated and combined financial statements.
Following the Separation, our consolidated financial statements include our accounts and our wholly owned subsidiaries and no longer include any allocations of expenses from Danaher to us.
Our consolidated and combined financial statements may not be indicative of our results had we been a separate stand-alone entity throughout the periods presented, nor are the results stated herein indicative of what our financial position, results of operations and cash flows may be in the future.
We have incurred and will incur additional costs as a separate public company. As a separate public company, our total costs related to such support functions may differ from the costs that were historically allocated to us from Danaher. These additional costs are primarily for the following:
•additional personnel costs, including salaries, benefits and potential bonuses and/or stock-based compensation awards for staff additions to replace support previously provided by Danaher that is not covered by the Transition Services Agreement; and
•corporate governance costs, including board of director compensation and expenses, audit and other professional services fees, annual report and proxy statement costs, SEC filing fees, transfer agent fees, consulting and legal fees and stock exchange listing fees.
Certain factors could impact the nature and amount of these separate public company costs, including the finalization of our staffing and infrastructure needs. Moreover, we are incurring and expect to incur certain nonrecurring internal costs to implement certain new systems, although we believe such costs going forward will not have a material impact on our financial statements.
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Our business consists of two segments: Specialty Products & Technologies and Equipment & Consumables. For additional details regarding these businesses, refer to “Item 1. Business” included in this Annual Report on Form 10-K.
OVERVIEW
General
We provide products that are used to diagnose, treat and prevent disease and ailments of the teeth, gums and supporting bone, as well as to improve the aesthetics of the human smile. We help our customers deliver the best possible patient care through industry-leading dental consumables, solutions, technology, and services. With leading brand names, innovative technology and significant market positions, we are a leading worldwide provider of a broad range of dental implants, orthodontic appliances, general dental consumables, equipment and services, and are dedicated to driving technological innovations that help dental professionals improve clinical outcomes and enhance productivity. Our research and development, manufacturing, sales, distribution, service and administrative facilities are located in more than 30 countries across North America, Asia, Europe, the Middle East and Latin America.
During 2021, 51% of our sales were derived from customers outside the United States. As a global provider of dental consumables, equipment and services, our operations are affected by worldwide, regional and industry-specific economic and political factors. Given the broad range of dental products, software and services provided and geographies served, we do not use any indices other than general economic trends to predict our overall outlook. Our individual businesses monitor key competitors and customers, including to the extent possible their sales, to gauge relative performance and the outlook for the future.
As a result of our geographic and product line diversity, we face a variety of opportunities and challenges, including rapid technological development in most of our served markets, the expansion and evolution of opportunities in emerging markets, trends and costs associated with a global labor force, consolidation of our competitors and increasing regulation. We operate in a highly competitive business environment in most markets, and our long-term growth and profitability will depend in particular on our ability to expand our business in emerging geographies and emerging market segments, identify, consummate and integrate appropriate acquisitions, develop innovative and differentiated new products and services, expand and improve the effectiveness of our sales force, continue to reduce costs and improve operating efficiency and quality and effectively address the demands of an increasingly regulated global environment. We are making significant investments to address the rapid pace of technological change in our served markets and to globalize our manufacturing, research and development and customer-facing resources (particularly in emerging markets and our dental implant business) in order to be responsive to our customers throughout the world and improve the efficiency of our operations.
Key Trends and Conditions Affecting Our Results of Operations
COVID-19
The continuing global spread of COVID-19 has led to unprecedented restrictions on, and disruptions in, business and personal activities, including as a result of preventive and precautionary measures that we, our dental customers, other businesses, our communities and governments are taking to mitigate the spread of the virus. The impact of COVID-19 and measures to prevent its spread are affecting our businesses in several ways as follows:
Employees and Customers
We value the safety of our employees and customers and have leveraged our technological resources to institute work-from-home arrangements for most of our employees and to continue interacting with our customers on a remote basis where possible. We have implemented social distancing guidelines, staggered shifts and more frequent disinfection processes for employees that need to be in manufacturing locations, offices or interact with customers to help ensure their safety. We have expanded the availability of our virtual training and education for our customers. Our employees have donated thousands of masks and other personal protective equipment to their local communities worldwide. In China, we were one of the first to donate infection prevention products to the Wuhan government and our Orascoptic business has donated eye protection to hundreds of healthcare professionals in the United States. Metrex, our infection control and prevention business, has been providing products to help our customers maintain proper disinfection protocols.
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Results of Operations
In early 2020, due to the COVID-19 pandemic, many dental associations globally recommended that dental practices delay elective procedures and only perform emergency procedures. As a result, our sales and results of operations were most impacted by the COVID-19 pandemic during the first and second quarters with positive signs of recovery during the third and fourth quarters of 2020. As a result, we implemented cost reduction measures, including a temporary reduction in our manufacturing capacity, temporary salary reductions, furloughs and reducing discretionary spending. As dental practices reopened, dental associations have recommended enhanced safety, disinfection and social distancing protocols. These measures may remain in place for a significant period of time in certain regions and may continue to adversely affect our business, results of operations and financial condition. During the 2021 year, we continued to see positive signs of recovery in certain markets in which we operate, however, certain markets continue to be more adversely impacted than others. While the rollout of COVID-19 vaccines throughout 2021 mitigated mortality risk, new COVID-19 variants, particularly the Delta and Omicron variants, proved to remain a threat. The lifting of lockdowns in certain areas started a slow economic recovery. The resulting increase in consumer demand has created significant challenges for supply chains as a result of labor and raw material shortages.
A worsening of the pandemic or impacts of new variants of the virus may lead to temporary closures of dental practices in the future. Furthermore, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that it could cause a material local and/or global economic slowdown or global recession. Such economic disruption could have a material adverse effect on our business as our customers curtail and reduce capital and overall spending. Policymakers around the globe have responded with fiscal policy actions to support the healthcare industry and economy as a whole. The magnitude and overall effectiveness of these actions remains uncertain.
The severity of the impact of the COVID-19 pandemic on our business will depend on a number of factors, including, but not limited to, the scope and duration of the pandemic, the rise of new variants, the extent and severity of the impact on our customers, the measures that have been and may be taken to contain the virus (including its various mutations) and mitigate its impact, U.S. and foreign government actions to respond to the reduction in global economic activity, our ability to continue to manufacture and source our products and to find suitable alternative products at reasonable prices, the impact of the pandemic and associated economic downturn on our ability to access capital if and when needed and how quickly and to what extent normal economic and operating conditions can resume, all of which are uncertain and cannot be predicted. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts on our financial condition and results of operations.
Our future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions and uncertain demand, and the impact of any initiatives or programs that we may undertake to address financial and operational challenges faced by our customers. The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity, or results of operations is uncertain. Because of the dynamic nature of the crisis, we cannot accurately predict the extent or duration of the impacts of the COVID-19 pandemic.
Liquidity
In May of 2020, we entered into an amendment (the “Amendment”) to our Credit Agreement that, among other changes as further described in Note 16 to our Audited Consolidated and Combined Financial Statements, waived the quarterly-tested leverage covenant and reduced the interest coverage ratio through and including the first quarter of 2021. On February 9, 2021, we entered into an additional amendment to our Credit Agreement that substantially reinstated the original terms of our Credit Agreement effective February 9, 2021. In connection with this new amendment we repaid $472.0 million of our three-year, €208 million senior unsecured term loan facility (“Euro Term Loan”) on February 9, 2021. On June 15, 2021, we entered into an amended and restated credit agreement (the “Amended Credit Agreement”) with a syndicate of banks including Bank of America, N.A. as administrative agent. The Amended Credit Agreement amends and restates the Company’s Credit Agreement, originally dated September 20, 2019. In May of 2020, we issued the Notes with gross and net proceeds of $517.5 million and $502.6 million, respectively. We believe the full borrowing capacity of $250.0 million available under the Revolving Credit Facility and the proceeds from the Notes, currently provide us with the appropriate level of flexibility to manage our operations. In future periods, the COVID-19 pandemic and its impact on the capital markets could impact our ability to obtain future financing.
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As noted above, we are aligning our cost structure to the realities of the current operating environment. We continue to focus on actions to preserve liquidity by actively managing all discretionary spending. We are also taking additional actions to improve the long-term financial structure of the business.
Industry Trends
We operate in the large and growing global dental products industry. We believe growth in the global dental industry will be driven by:
◦an aging population;
◦the current underpenetration of dental procedures, especially in emerging markets;
◦improving access to complex procedures due to increasing technological innovation;
◦an increasing demand for cosmetic dentistry; and
◦growth of DSOs, which are expected to drive increasing penetration of, and access to, dental care globally.
Product Development, New Product Launches and Commercial Investment
A key element of our targeted value creation strategy is to drive growth through portfolio development and product innovation. Our future growth and success depend on both our pipeline of new products and technologies, including new products and technologies that we may obtain through license or acquisition, and the expansion of the use of our existing products and technologies. We believe we are a leader in dental research and development (“R&D”), with approximately $320 million of R&D expenditures since 2019 and a track record of product innovation, business development and commercialization.
Additionally, investment in our commercial sales organization, particularly within our implant business and in emerging markets, is critical to our growth strategy. Our sales in China grew at a low-double digit compounded annual growth rate from 2019 through 2021.
We continue transforming our portfolio by investing in our implant and orthodontic businesses and also making investments in emerging markets. The cost reduction initiatives we have taken and will continue to undertake in the future allow us to further invest in this growth strategy, which in turn we believe should improve our margins.
Our continued investment in Spark, our clear aligner system, has led to increased manufacturing capacity and continues to gain market adoption as orthodontists and their patients see the benefits of the clear, stain resistant and comfortable design.
In 2021, Ormco launched the Damon UltimaTM System, a revolutionary passive self-ligation braces technology that is the first true full-expression system designed for faster and more precise finishing.
Our N1 implant system, which was launched in Europe in June of 2020, recently received clearance from the U.S. Food and Drug Administration, with authorization for sale in further regions pending, and which we believe will be a significant product for Nobel and will simplify the implant procedure.
Our Nobel business has obtained the EU Medical Device Regulation (“MDR”) Quality Management System certification and is one of the first in the dental industry to do so. This is an important milestone for Nobel, and we believe that we are on track in our efforts to achieve MDR certification for our full portfolio of products.
Foreign Exchange Rates
Significant portions of our sales and costs are exposed to changes in foreign exchange rates. During the year ended December 31, 2021, our products were sold in more than 100 countries and 51% of our sales were denominated in foreign currencies. We seek to manage our foreign exchange risk, in part, through our operations, including managing same-currency sales in relation to same-currency costs and same-currency assets in relation to same-currency liabilities. As our operations use multiple foreign currencies, including the euro, British pound, Brazilian real, Australian dollar, Japanese yen, Canadian dollar and Chinese yuan, changes in those currencies relative to the U.S. dollar will impact our sales, cost of sales and expenses, and consequently, net income. Exchange rate fluctuations in emerging markets may also directly affect our customers’ ability to buy our products in these geographic markets.
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On a year-over-year basis, currency exchange rates negatively impacted reported sales by 1.5% for the year ended December 31, 2021 compared to the comparable period of 2020, primarily due to the strength of the U.S. dollar against most major currencies. Any future strengthening of the U.S. dollar against major currencies would adversely impact our sales and results of operations for the remainder of the year, and any weakening of the U.S. dollar against major currencies would positively impact our sales and results of operations for the remainder of the year.
General Economic Conditions
In addition to industry-specific factors, we, like other businesses, face challenges related to global economic conditions. Dental costs are largely out-of-pocket for the consumer and thus utilization rates can vary significantly depending on economic growth. While many of our products are considered necessary by patients regardless of the economic environment, certain products and services that support discretionary dental procedures may be more susceptible to changes in economic conditions.
Manufacturing and Supply
While the rollout of COVID-19 vaccines throughout 2021 mitigated mortality risk, new COVID-19 variants, particularly the Delta and Omicron variants, proved to remain a threat. The lifting of lockdowns in certain areas started a slow economic recovery. The resulting increase in consumer demand has created significant challenges for supply chains as a result of labor and raw material shortages.
In order to sell our products, we must be able to reliably produce and ship our products in sufficient quantities. Many of our products involve complex manufacturing processes and are produced at one or a limited number of manufacturing sites.
Minor deviations in our manufacturing or logistical processes, unpredictability of a product’s regulatory or commercial success or failure, the lead time necessary to construct highly technical and complex manufacturing sites and shifting customer demand increase the potential for capacity imbalances. For a discussion of risks relating to our manufacturing process, refer to “Item 1A. Risk Factors—Risks Related to Our Business.”
Components of Sales and Costs and Expenses
Sales
Our sales are primarily derived from the sale of dental consumables, equipment and services to third-party distributors and end-users. For additional information regarding our products, including descriptions of our products, refer to “Item 1. Business—Business Segments.”
Costs and Expenses and Other
Cost of sales consists primarily of cost of materials, facilities and other infrastructure used to manufacture our products and shipping and handling costs attributable to delivering our products to our customers. Also included in cost of sales are productivity improvement and restructuring expenses related to our manufacturing operations.
Selling, general and administrative (“SG&A”) expenses consist of, among other things, the costs of selling, marketing, promotion, advertising and administration (including business technology, facilities, legal, finance, human resources, business development and procurement) and amortization expense for intangible assets that have been acquired through business combinations. Also included in SG&A are productivity improvement and restructuring expenses related to our administrative operations.
R&D expenses consist of project costs specific to new product R&D and product lifecycle management, overhead costs associated with R&D operations, regulatory costs, product registrations and investments that support local market clinical trials for approved indications. We manage overall R&D based on our strategic opportunities and do not disaggregate our R&D expenses by the nature of the expense or by product as we do not use or maintain such information in managing our business.
Nonoperating income (expense) consists of the non-service cost components of net periodic benefit costs (which include interest costs, expected return on plan assets, amortization of prior service cost or credits and actuarial gains and losses) and interest expense, net.
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Business Performance
During the year ended December 31, 2021, our sales increased 30.1%, while core sales increased 29.0% as compared to the comparable period of 2020. The impact of foreign currency exchange rates reduced sales in the year ended December 31, 2021 by 1.5% compared to the comparable period of 2020. The impact of discontinued products increased revenues in the year ended December 31, 2021 by 0.4%.
Acquisitions and Divestitures
Our growth strategy contemplates future acquisitions. Our operations and results can be affected by the rate and extent to which appropriate acquisition opportunities are available, acquired businesses are effectively integrated and anticipated synergies or cost savings are achieved.
On September 7, 2021, we entered into the Purchase Agreement with Planmeca and Planmeca Oy, a privately-held Finnish company, as guarantor, pursuant to which we will sell to Planmeca our KaVo Treatment Unit and Instrument Business (the “Divestiture”). On December 31, 2021, we completed the Divestiture to Planmeca, pursuant to the Purchase Agreement among us, Planmeca, and Planmeca Oy, as guarantor. In accordance with the terms of the Purchase Agreement, we received cash consideration of $317.3 million upon closing, which remains subject to certain adjustments. We expect to receive an earnout payment of $30 million in the first quarter of 2022, plus an estimated $40.9 million in adjustments under the Purchase Agreement in the second quarter of 2022. A gain of $11.7 million, net of taxes has been recorded and included in income from discontinued operations in the Consolidated and Combined Statements of Operations.
The Divestiture was part of our strategy to structurally improve our long-term margins and represented a strategic shift with a major effect on our operations and financial results as described in AS 205-20. The sale met the criteria to be accounted for as a discontinued operation. Accordingly, we have applied discontinued operations treatment for the Divestiture as required by ASC 205-20. In accordance with ASC 205-20, we reclassified the Divestiture to assets and liabilities held for sale on our Consolidated Balance Sheets as of December 31, 2021 and 2020 and reclassified the financial results of the Divestiture in our Consolidated and Combined Statements of Operations for all periods presented. Our Consolidated and Combined Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 include the financial results of the KaVo Treatment Unit and Instrument Business. We also revised our discussion and presentation of operating and financial results to be reflective of our continuing operations as required by ASC 205-20. All segment information and descriptions exclude the KaVo Treatment Unit and Instrument Business.
With the sale of the KaVo Treatment Unit and Instrument business, we continue to make significant progress toward our long-term goal of re-calibrating our product portfolio to higher growth and higher margin segments. The Divestiture shifts our revenue mix from approximately 50% each for the Specialty Products & Technology and Equipment & Consumables segments to approximately 60% for the Specialty Products & Technology segment and approximately 40% for the Equipment & Consumables segment. The Specialty Products & Technology segment is a higher growth and higher margin business than the Equipment & Consumables segment. The Divestiture is a strategic shift that will allow us to focus more on higher value and higher margin consumables, imaging, and digital workflow solutions.
On December 22, 2021, we entered into a stock and asset purchase agreement (the "Purchase Agreement") with Carestream Dental Technology Parent Limited ("Carestream"), a private limited company registered in England and Wales, pursuant to which Carestream and certain of its subsidiaries (together with Carestream, the "Sellers") will sell to the Company the Sellers' intraoral scanner business (the "Intraoral Scanner Business") for total consideration of $600 million, subject to certain customary adjustments as provided in the Purchase Agreement. The Purchase Agreement provides that, upon the terms and conditions set forth therein, the Company will purchase the Intraoral Scanner Business through the acquisition of certain assets and the assumption of certain liabilities, as well as the acquisition of the equity of certain subsidiaries of the Sellers (the "IOS Acquisition"). The transaction is expected to close in the second quarter of 2022. With the sale of the KaVo Treatment Unit and Instrument Business and the pending IOS Acquisition, we continue to make significant progress toward our long-term goal of re-calibrating our product portfolio to higher growth and higher margin segments. Both the Divestiture and the pending IOS Acquisition are strategic shifts that will allow us to focus more on higher value and higher margin consumables, imaging, and digital workflow solutions.
On January 21, 2020, we acquired all of the shares of Matricel GmbH (“Matricel”) for cash consideration of approximately $43.6 million. Matricel, a German company, is a provider of biomaterials used in dental applications and is part of our Specialty Products and Technologies segment. For the year ended December 31, 2020, Matricel’s revenue and earnings were not material to our Consolidated and Combined Statements of Operations.
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UK’s Referendum Decision to Exit the EU
In a referendum on June 23, 2016, voters approved for the United Kingdom (“UK”) to exit the European Union (“EU”). A withdrawal agreement negotiated by and between the UK prime minister and the EU was ratified by the UK parliament in December 2019. The UK exited the EU on January 31, 2020. A transition period began and business remained as usual until December 31, 2020. The new Trade and Cooperation Agreement (“TCA”) signed by the EU and UK on December 30, 2020 and entered into force on May 1, 2021 brings little benefits for our dental business, since almost all of our products are already 0% duty rated under the WTO tariffs, and the agreement neither includes any customs or tax simplification regime nor any mutual recognition of medical device regulations of the EU and UK. To mitigate the potential impact of Brexit on the supply of our European goods to the UK, we have adapted our supply chain and financial processes accordingly, and, in some cases, temporarily increased our level of inventory within the UK to ensure that our customers receive our products timely. Our operating companies have begun to work through the new UK regulations to register products with the MHRA (UK’s Medicines and Healthcare products Regulatory Agency) and meet the future requirements of MHRA for foreign manufacturers of medical devices which become effective on July 1, 2023. The TCA allows for future deviation from the current regulatory framework and it is not known if and/or when any deviations may occur, which may have an impact on development, manufacture, marketing authorization, commercial sales and distribution of certain of our products. The ultimate impact of UK exiting the EU on our financial results is uncertain.
Public Company Expenses
As a result of the Separation, we are subject to the Sarbanes-Oxley Act and reporting requirements of the Exchange Act. We are now required to have additional procedures and practices as a separate public company. As a result, we have incurred and will continue to incur additional personnel and corporate governance costs, including internal audit, investor relations, stock administration and regulatory compliance costs.
Non-GAAP Measures
In order to establish period-to-period comparability, beginning with the third quarter of 2019 (the first quarter during which we reported our results as a separate, public company), we modified the definition of core sales to exclude the impact from sales of discontinued products. We exclude sales from discontinued products because discontinued products do not have a continuing contribution to operations and management believes that excluding such items provides investors with a means of evaluating our on-going operations and facilitates comparisons to our peers. Core growth for the years ended December 31, 2021 and 2020, set forth in this Management’s Discussion and Analysis of Financial Condition and Results of Operations excludes the impact from sales of discontinued products. References to the non-GAAP measure of core sales (also referred to as core revenues or sales/revenues from existing businesses) refer to sales calculated according to GAAP, but excluding:
•sales from acquired businesses;
•sales from discontinued products; and
•the impact of currency translation.
Sales from discontinued products includes major brands or major products that we have made the decision to discontinue as part of a portfolio restructuring. Discontinued brands or products consist of those which we (1) are no longer manufacturing, (2) are no longer investing in the research or development of, and (3) expect to discontinue all significant sales of within one year from the decision date to discontinue. The portion of sales attributable to discontinued brands or products is calculated as the net decline of the applicable discontinued brand or product from period-to-period.
The portion of sales attributable to currency translation is calculated as the difference between:
•the period-to-period change in sales; and
•the period-to-period change in sales after applying current period foreign exchange rates to the prior year period.
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Core sales growth should be considered in addition to, and not as a replacement for or superior to, sales, and may not be comparable to similarly titled measures reported by other companies. We believe that reporting the non-GAAP financial measure of core sales growth provides useful information to investors by helping identify underlying growth trends in our on-going business and facilitating comparisons of our sales performance with our performance in prior and future periods and to our peers. We also use core sales growth to measure our operating and financial performance. We exclude the effect of currency translation from core sales because currency translation is not under our control, is subject to volatility and can obscure underlying business trends.
Throughout this discussion, references to sales volume refer to the impact of both price and unit sales and references to productivity improvements generally refer to improved cost-efficiencies resulting from the ongoing application of EBS. We believe our deep-rooted commitment to EBS helps drive our market leadership and differentiates us in the dental products industry. EBS encompasses not only lean tools and processes, but also methods for driving growth, innovation and leadership. Within the EBS framework, we pursue a number of ongoing strategic initiatives relating to streamlining business operations, portfolio simplification, reduction of costs, redeployment of resources, customer insight generation, product development and commercialization, efficient sourcing, and improvement in manufacturing and back-office support, all with a focus on continually improving quality, delivery, cost, growth and innovation.
RESULTS OF OPERATIONS
The following discussion and analysis of our consolidated and combined statements of earnings should be read along with our audited consolidated and combined financial statements included elsewhere in this Annual Report on Form 10-K. Unless otherwise indicated, all financial data in this Annual Report on Form 10K refer to continuing operations only. For more information on the consolidated and combined basis of preparation, see Note 1 to our audited consolidated and combined financial statements elsewhere in this Annual Report on Form 10-K.
| Years Ended December 31, | % Change | % Change | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) | 2021 | 2020 | 2019 | 2021/2020 | 2020/2019 | |||||||||||||
| Sales | $ | 2,508.9 | 100.0% | $ | 1,929.1 | 100.0% | $ | 2,284.8 | 100.0% | 30.1 | % | (15.6) | % | |||||
| Cost of sales | 1,082.4 | 43.1% | 874.3 | 45.3% | 935.6 | 40.9% | 23.8 | % | (6.6) | % | ||||||||
| Gross profit | 1,426.5 | 56.9% | 1,054.8 | 54.7% | 1,349.2 | 59.1% | 35.2 | % | (21.8) | % | ||||||||
| Operating costs: | ||||||||||||||||||
| SG&A expenses | 1,019.8 | 40.6% | 924.6 | 47.9% | 980.4 | 42.9% | 10.3 | % | (5.7) | % | ||||||||
| R&D expenses | 100.5 | 4.0% | 86.7 | 4.5% | 133.1 | 5.8% | 15.9 | % | (34.9) | % | ||||||||
| Operating profit | 306.2 | 12.2% | 43.5 | 2.3% | 235.7 | 10.3% | 603.9 | % | (81.5) | % | ||||||||
| Nonoperating income (expense): | ||||||||||||||||||
| Other income (expense) | 2.4 | 0.1% | (1.0) | (0.1)% | 1.5 | 0.1% | (340.0) | % | (166.7) | % | ||||||||
| Interest expense, net | (54.1) | (2.2)% | (62.5) | (3.2)% | (3.5) | (0.2)% | (13.4) | % | NM | |||||||||
| Income (loss) before income taxes | 254.5 | 10.1% | (20.0) | (1.0)% | 233.7 | 10.2% | NM | (108.6) | % | |||||||||
| Income tax (benefit) expense | (9.0) | (0.4)% | (62.5) | (3.2)% | 49.6 | 2.2% | (85.6) | % | (226.0) | % | ||||||||
| Income from continuing operations | 263.5 | 10.5% | 42.5 | 2.2% | 184.1 | 8.1% | 520.0 | % | (76.9) | % | ||||||||
| Income (loss) from discontinued operations, net of tax | 77.0 | 3.1% | (9.2) | (0.5)% | 33.5 | 1.5% | (937.0) | % | (127.5) | % | ||||||||
| Net income | $ | 340.5 | 13.6% | $ | 33.3 | 1.7% | $ | 217.6 | 9.5% | 922.5 | % | (84.7) | % | |||||
| Effective tax rate | (3.5) | % | 312.5 | % | 21.2 | % |
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Business Segments
Sales by business segment were as follows ($ in millions):
| For the Years Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||
| Specialty Products & Technologies | $ | 1,507.8 | $ | 1,117.3 | $ | 1,342.7 | ||||
| Equipment & Consumables | 1,001.1 | 811.8 | 942.1 | |||||||
| Total | $ | 2,508.9 | $ | 1,929.1 | $ | 2,284.8 |
GAAP Reconciliation
Sales and Core Sales Growth
| 2021 vs. 2020 | 2020 vs. 2019 | ||||
|---|---|---|---|---|---|
| Total sales growth (GAAP) | 30.1 | % | (15.6) | % | |
| Less the impact of: | |||||
| Acquisitions | — | % | (0.2) | % | |
| Discontinued products | 0.4 | % | 0.6 | % | |
| Currency exchange rates | (1.5) | % | 0.2 | % | |
| Core sales growth (non-GAAP) | 29.0 | % | (15.0) | % |
2021 Compared to 2020
For the year ended December 31, 2021, sales and core sales increased in the majority of the markets in which we operate as demand increased due to more patients seeking dental care with more dental offices being open compared to 2020. Sales and core sales for the year ended December 31, 2020 were impacted by the COVID-19 pandemic.
Total sales growth increased 30.1% for the year ended December 31, 2021 compared to the comparable period in 2020. Price positively impacted sales growth by 0.3% on a year-over-year basis in the year ended December 31, 2021. During 2021, sales increased by 28.3% due to higher volume, including the impact of discontinued products and product mix. Sales in developed markets increased primarily due to an increase in North America, Western Europe, Japan and Australia. Sales in emerging markets increased primarily due to an increase in Eastern Europe, China and Russia.
Core sales growth for the year ended December 31, 2021 increased 29.0%, compared to the comparable period of 2020. Core sales increased primarily due to higher volume and product mix. Core sales in developed markets increased primarily due to an increase in North America, Western Europe, Japan and Australia. Core sales in emerging markets increased primarily due to an increase in Eastern Europe, China and Russia.
2020 Compared to 2019
Sales decreased 15.6% for the year ended December 31, 2020 compared to the comparable period in 2019. Price negatively impacted sales growth by 0.2% on a year-over-year basis in the year ended December 31, 2020. During 2020, sales decreased by 14.8% due to lower volume, including the impact of discontinued products and product mix primarily due to the impact of COVID-19, partially offset by revenue from the acquisition of Matricel. Sales in developed markets decreased during 2020, as compared to the comparable period of 2019, primarily due to a decrease in North America and Western Europe. Sales in emerging markets decreased during 2020, as compared to the comparable period of 2019, with sales decreasing in most major regions.
Core sales growth for the year ended December 31, 2020, decreased 15.0%, compared to the comparable period of 2019. Core sales decreased during 2020 in most markets we serve primarily due to the impact of COVID-19. Core sales in developed markets decreased during 2020, as compared to the comparable period of 2019, primarily due to a decrease in North America and Western Europe. Core sales in emerging markets decreased during 2020, as compared to the comparable period of 2019, with core sales decreasing in most major regions. Despite the impacts of COVID-19, China’s core sales increased in the low-single digits during 2020.
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COST OF SALES AND GROSS PROFIT
| For the Years Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) | 2021 | 2020 | 2019 | |||||||
| Sales | $ | 2,508.9 | $ | 1,929.1 | $ | 2,284.8 | ||||
| Cost of sales | 1,082.4 | 874.3 | 935.6 | |||||||
| Gross profit | $ | 1,426.5 | $ | 1,054.8 | $ | 1,349.2 | ||||
| Gross profit margin | 56.9 | % | 54.7 | % | 59.1 | % |
2021 Compared to 2020
The increase in cost of sales during the year ended December 31, 2021, as compared to the comparable period in 2020, was primarily due to higher sales as a result of higher demand as patients sought dental care with more dental offices being open compared to 2020 and restructuring costs, partially offset by improved sales mix, favorable foreign exchange rates and lower incremental period-over-period savings associated with restructuring and productivity improvement actions taken in prior periods.
The increase in gross profit margin during the year ended December 31, 2021, as compared to the comparable period in 2020, was primarily due to higher sales volume, improved product mix and favorable foreign exchange rates, partially offset by unfavorable restructuring costs and lower incremental period-over-period savings associated with restructuring and productivity improvement actions taken in prior periods.
2020 Compared to 2019
The decrease in cost of sales during the year ended December 31, 2020, as compared to the comparable period in 2019, was primarily due to lower sales as a result of the COVID-19 pandemic, partially offset by an unfavorable sales mix, restructuring costs, excess capacity costs and the impact of foreign currency exchange rates.
The decrease in gross profit margin during the year ended December 31, 2020, as compared to the comparable period in 2019, was due primarily to lower sales as a result of the COVID-19 pandemic, an unfavorable sales mix, restructuring costs, excess capacity costs and the impact of foreign currency exchange rates.
OPERATING EXPENSES
| For the Years Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) | 2021 | 2020 | 2019 | |||||||
| Sales | $ | 2,508.9 | $ | 1,929.1 | $ | 2,284.8 | ||||
| Selling, general and administrative expenses | 1,019.8 | 924.6 | 980.4 | |||||||
| Research and development expenses | 100.5 | 86.7 | 133.1 | |||||||
| SG&A as a % of sales | 40.6 | % | 47.9 | % | 42.9 | % | ||||
| R&D as a % of sales | 4.0 | % | 4.5 | % | 5.8 | % |
2021 Compared to 2020
SG&A expenses as a percentage of sales for the year ended December 31, 2021 decreased as compared to the comparable period of 2020, primarily due to higher sales, lower restructuring expenses and favorable incremental period-over-period savings associated with restructuring improvement actions taken in prior periods, partially offset by higher sales and marketing, compensation and administrative spend.
The decrease in R&D expenses as a percentage of sales for the year ended December 31, 2021, as compared to the comparable period of 2020, was primarily due to higher sales, partially offset by increased spending on product development initiatives in the Specialty Products & Technologies segment.
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2020 Compared to 2019
The increase in SG&A expenses as a percentage of sales for the year ended December 31, 2020, as compared to the comparable period of 2019, was primarily due to lower sales, restructuring and productivity improvement expenses and incremental public company costs, partially offset by cost reduction initiatives including employee furloughs, pay cuts, reduced discretionary spend (including sales, marketing and travel) and incremental period-over-period savings associated with restructuring and productivity improvement actions taken in prior periods.
The decrease in R&D expenses as a percentage of sales for the year ended December 31, 2020, as compared to the comparable period of 2019, was primarily due to a decrease in spending on product development initiatives in the Equipment & Consumables segment.
OPERATING PROFIT
2021 Compared to 2020
Operating profit margin was 12.2% for the year ended December 31, 2021, as compared to an operating profit margin of 2.3% for the comparable period of 2020. The increase in operating profit margin was primarily due to higher sales volume and improved product mix, lower restructuring expenses, favorable incremental period-over-period savings associated with restructuring improvement actions taken in prior periods, partially offset by higher sales and marketing, compensation, and administrative spend.
2020 Compared to 2019
Operating profit margin was 2.3% for the year ended December 31, 2020, as compared to an operating profit margin of 10.3% for the comparable period of 2019. The decrease in operating profit margin was due to lower sales primarily due to the impact of the COVID-19 pandemic, an unfavorable sales mix, higher restructuring and productivity improvement expenses, incremental public company costs and the impact of foreign currency exchange rates, partially offset by cost reduction initiatives including employee furloughs, pay cuts, reduced discretionary spend (including sales, marketing and travel research and development) and incremental period-over-period savings associated with restructuring and productivity improvement actions taken in prior periods.
OTHER (EXPENSE) INCOME, NET
The other components of net periodic benefit costs included in other (expense) income for the years ended December 31, 2021, 2020 and 2019 were $2.6 million, $(0.3) million, and $2.1 million, respectively.
INTEREST COSTS AND FINANCING
Interest cost for the year ended December 31, 2021 was $54.1 million compared to $62.5 million in 2020. The decrease in interest expense for the year ended December 31, 2021 as compared to the comparable period of 2020 was primarily due to lower debt levels as a result of paying down the Euro Term Loan in the amount of $472.0 million. In addition, we had lower interest rates on the outstanding debt as a result of entering into the amendment to the Credit Agreement in February of 2021. For a discussion of our outstanding indebtedness, refer to Note 16 to our audited consolidated and combined financial statements elsewhere in this Annual Report on Form 10-K.
INCOME TAXES
| For the Years Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||
| Effective tax rate | (3.5) | % | 312.5 | % | 21.2 | % |
Our effective tax rate for the year ended December 31, 2021 was (3.5)% compared to 312.5% in 2020. The change in the effective tax rate was primarily due to the impact of the higher earnings before income taxes in 2021 compared to the relatively small loss before income taxes in 2020, the recognition of additional amortizable deferred tax assets associated with the estimated value of a tax basis step-up of certain of the Company’s Swiss assets, and a decrease in the valuation allowance on certain Swiss net operating losses.
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Our effective tax rate for the year ended December 31, 2020 was 312.5% compared to 21.2% in 2019. The change in the effective tax rate was primarily due to the impact of the loss before income taxes in 2020 relative to the higher income before taxes in 2019 and the recognition of an amortizable deferred tax asset associated with the estimated value of a tax basis step-up of certain of the Company’s Swiss assets.
COMPREHENSIVE INCOME
2021 Compared to 2020
For the year ended December 31, 2021, comprehensive income increased $203.1 million as compared to 2020. The increase for the year ended December 31, 2021 was primarily due to net income generated in the current period, partially offset by higher foreign currency translation losses.
2020 Compared to 2019
For the year ended December 31, 2020, comprehensive income decreased $65.9 million as compared to 2019. The decrease was primarily due to lower net income, partially offset by higher foreign currency translation gains and pension plan gains.
SPECIALTY PRODUCTS & TECHNOLOGIES
Our Specialty Products & Technologies segment develops, manufactures and markets dental implant systems, dental prosthetics and associated treatment software and technologies, as well as orthodontic bracket systems, aligners and lab products.
Specialty Products & Technologies Selected Financial Data
| For the Years Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) | 2021 | 2020 | 2019 | |||||||
| Sales | $ | 1,507.8 | $ | 1,117.3 | $ | 1,342.7 | ||||
| Operating profit | 272.3 | 65.8 | 218.3 | |||||||
| Depreciation | 24.0 | 20.6 | 17.7 | |||||||
| Amortization | 60.0 | 60.0 | 57.7 | |||||||
| Operating profit as a % of sales | 18.1 | % | 5.9 | % | 16.3 | % | ||||
| Depreciation as a % of sales | 1.6 | % | 1.8 | % | 1.3 | % | ||||
| Amortization as a % of sales | 4.0 | % | 5.4 | % | 4.3 | % |
GAAP Reconciliation
Sales and Core Sales Growth
| 2021 vs. 2020 | 2020 vs. 2019 | ||||
|---|---|---|---|---|---|
| Total sales growth (GAAP) | 34.9 | % | (16.8) | % | |
| Less the impact of: | |||||
| Acquisitions | — | % | (0.3) | % | |
| Discontinued products | (0.1) | % | 0.6 | % | |
| Currency exchange rates | (1.8) | % | (0.1) | % | |
| Core sales growth (non-GAAP) | 33.0 | % | (16.6) | % |
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2021 Compared to 2020
Sales
For the year ended December 31, 2021, sales and core sales increased in the majority of the markets in which we operate as demand increased due to more patients seeking dental care with more dental offices being open compared to 2020. Sales and core sales for the year ended December 31, 2020 were impacted by the COVID-19 pandemic.
Total sales growth increased 34.9% for the year ended December 31, 2021 compared to the comparable period in 2020. Price negatively impacted sales growth by 0.1% on a year-over-year basis in the year ended December 31, 2021. During 2021, sales increased by 33.2% due to higher volume and product mix as demand improved for implant systems and orthodontic products. Sales in developed markets increased primarily due to an increase in North America, Australia, Japan and Western Europe. Sales in emerging markets increased primarily due to an increase in China, Eastern Europe, India and Russia.
Core sales growth for the year ended December 31, 2021 increased 33.0%, compared to the comparable period of 2020, primarily due to higher volume and product mix as demand improved for implant systems and orthodontic products. Core sales in developed markets increased primarily due to an increase in North America, Australia, Japan and Western Europe. Core sales in emerging markets increased primarily due to an increase in China, Eastern Europe, India and Russia.
Operating Profit
Operating profit margin was 18.1% for the year ended December 31, 2021, as compared to an operating profit margin of 5.9% for the comparable period of 2020. The increase in operating profit margin was primarily due to higher sales volume and improved product mix, lower restructuring expenses, favorable incremental period-over-period savings associated with restructuring and productivity improvement actions taken in prior periods, partially offset by higher sales and marketing and compensation spend.
2020 Compared to 2019
Sales
Sales decreased 16.8% for the year ended December 31, 2020 compared to the comparable period in 2019. Price negatively impacted sales growth by 0.6% on a year-over-year basis in the year ended December 31, 2020. During 2020, sales decreased in most of the markets we serve by 16.1% due to lower volume and product mix primarily due to the impact of COVID-19, partially offset by revenue from the acquisition of Matricel.
Core sales growth for the year ended December 31, 2020 decreased 16.6%, compared to the comparable period of 2019. Geographically, the decrease in core sales growth was primarily due to lower core sales in North America, Western Europe and Asia, excluding China. Core sales decreased for implant systems and orthodontic products in most of the markets we serve primarily as a result of the COVID-19 pandemic, partially offset by increased demand for both implant systems and orthodontic products in China.
Operating Profit
Operating profit margin was 5.9% for the year ended December 31, 2020, as compared to an operating profit margin of 16.3% for the comparable period of 2019. The decrease in operating profit margin was primarily due to lower sales primarily due to the impact of the COVID-19 pandemic, an unfavorable sales mix, higher restructuring and productivity improvement expenses, excess capacity costs and the impact of foreign currency exchange rates, partially offset by cost reduction initiatives including employee furloughs, pay cuts, reduced discretionary spend (including sales, marketing and travel) and incremental period-over-period savings associated with restructuring and productivity improvement actions taken in prior periods.
EQUIPMENT & CONSUMABLES
Our Equipment & Consumables segment develops, manufactures and markets dental equipment and supplies used in dental offices, including digital imaging systems, software and other visualization/magnification systems; endodontic systems and related consumables; restorative materials and instruments, rotary burs, impression materials, bonding agents and cements and infection prevention products.
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Equipment & Consumables Selected Financial Data
| For the Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) | 2021 | 2020 | 2019 | |||||||
| Sales | $ | 1,001.1 | $ | 811.8 | $ | 942.1 | ||||
| Operating profit | 153.8 | 53.6 | 73.4 | |||||||
| Depreciation | 9.9 | 11.4 | 15.5 | |||||||
| Amortization | 21.5 | 27.3 | 27.8 | |||||||
| Operating profit as a % of sales | 15.4 | % | 6.6 | % | 7.8 | % | ||||
| Depreciation as a % of sales | 1.0 | % | 1.4 | % | 1.6 | % | ||||
| Amortization as a % of sales | 2.1 | % | 3.4 | % | 3.0 | % |
GAAP Reconciliation
Sales and Core Sales Growth
| 2021 vs. 2020 | 2020 vs. 2019 | ||||
|---|---|---|---|---|---|
| Total sales growth (GAAP) | 23.3 | % | (13.8) | % | |
| Less the impact of: | |||||
| Discontinued products | 1.0 | % | 0.7 | % | |
| Currency exchange rates | (0.9) | % | 0.3 | % | |
| Core sales growth (non-GAAP) | 23.4 | % | (12.8) | % |
2021 Compared to 2020
Sales
For the year ended December 31, 2021, sales and core sales increased in the majority of the markets in which we operate as demand increased due to more patients seeking dental care with more dental offices being open compared to 2020. Sales and core sales for the year ended December 31, 2020 were impacted by the COVID-19 pandemic.
Total sales growth increased 23.3% for the year ended December 31, 2021 compared to the comparable period in 2020. Price positively impacted sales growth by 0.9% on a year-over-year basis in the year ended December 31, 2021. During 2021, sales increased in 21.6% due to higher volume, including the impact of discontinued products and product mix as demand improved for equipment and consumables. Sales in developed markets increased primarily due to an increase in North America, Western Europe, Japan and Australia. Sales in emerging markets increased primarily due to an increase Russia and Brazil, partially offset by lower sales in China and India.
Core sales growth for the year ended December 31, 2021 increased 23.4%, compared to the comparable period of 2020. Core sales increased primarily due to higher volume, including the impact of discontinued products and product mix as demand improved for equipment and consumables. Core sales in developed markets increased primarily due to an increase in North America, Western Europe and Australia. Core sales in emerging markets increased primarily due to an increase in Russia and Brazil; partially offset by lower sales in China and India.
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Operating Profit
Operating profit margin was 15.4% for the year ended December 31, 2021, as compared to an operating profit margin of 6.6% for the comparable period of 2020. The increase in operating profit margin was primarily due to higher sales volume, improved product mix, lower restructuring expenses, and favorable incremental period-over-period savings associated with restructuring and productivity improvement actions taken in prior periods, partially offset by higher compensation and administrative spend.
2020 Compared to 2019
Sales
Sales decreased 13.8% for the year ended December 31, 2020 compared to the comparable period in 2019. Price positively impacted sales growth by 0.3% on a year-over-year basis in the year ended December 31, 2020. During 2020, sales decreased in most of the markets we serve by 13.8% due to lower volume and product mix primarily due to the impact of COVID-19.
Core sales growth for the year ended December 31, 2020 decreased 12.8%, compared to the comparable period of 2019. Geographically, the decrease in core sales growth was primarily due to lower core sales in North America, Western Europe and Asia. Core sales of equipment and traditional consumables decreased in most of the markets we serve primarily as a result of the COVID-19 pandemic, partially offset by increased demand for our infection prevention products.
Operating Profit
Operating profit margin was 6.6% for the year ended December 31, 2020, as compared to an operating profit margin of 7.8% for the comparable period of 2019. The decrease in operating profit margin was primarily due to lower sales due to the impact of the COVID-19 pandemic, an unfavorable sales mix, higher restructuring and productivity improvement expenses, excess capacity costs and the impact of foreign currency exchange rates, partially offset by cost reduction initiatives including employee furloughs, pay cuts, reduced discretionary spend (including sales, marketing and travel, research and development) and incremental period-over-period savings associated with restructuring and productivity improvement actions taken in prior periods.
LIQUIDITY AND CAPITAL RESOURCES
Before the Separation, we were dependent upon Danaher for all of our working capital and financing requirements under Danaher’s centralized approach to cash management and financing of its operations. Our financial transactions were accounted for through our former parent investment, net account. Accordingly, none of Danaher’s cash, cash equivalents or debt has been assigned to us for the periods prior to the Separation.
As a result of the Separation, we no longer participate in Danaher’s cash management and financing operations. We assess our liquidity in terms of our ability to generate cash to fund our operating and investing activities. We continue to generate substantial cash from operating activities and believe that our operating cash flow and other sources of liquidity are sufficient to allow us to manage our capital structure on a short-term and long-term basis and continue investing in existing businesses and consummating strategic acquisitions.
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Following is an overview of our cash flows and liquidity:
Overview of Cash Flows and Liquidity
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) | 2021 | 2020 | 2019 | |||||||
| Net cash provided by operating activities | $ | 361.6 | $ | 283.9 | $ | 397.5 | ||||
| Acquisitions, net of cash acquired | $ | (2.1) | $ | (40.7) | $ | — | ||||
| Payments for additions to property, plant and equipment | (54.7) | (47.7) | (77.8) | |||||||
| Proceeds from sales of property, plant and equipment | 11.6 | 5.3 | 1.6 | |||||||
| Proceeds from sale of Kavo treatment unit and instrument business | 312.5 | — | — | |||||||
| All other investing activities | (4.6) | 14.0 | (2.2) | |||||||
| Net cash provided by (used in) investing activities | $ | 262.7 | $ | (69.1) | $ | (78.4) | ||||
| Proceeds from issuance of convertible senior notes | $ | — | $ | 517.5 | $ | — | ||||
| Payment of debt issuance and other deferred financing costs | (2.3) | (17.2) | (2.4) | |||||||
| Proceeds from revolving line of credit | — | 249.8 | — | |||||||
| Repayment of revolving line of credit | — | (250.0) | — | |||||||
| Proceeds from borrowings | — | — | 1,318.3 | |||||||
| Repayment of borrowings | (475.7) | — | (0.3) | |||||||
| Purchase of capped calls related to issuance of convertible senior notes | — | (20.7) | — | |||||||
| Proceeds from stock option exercises | 19.5 | 13.8 | — | |||||||
| Proceeds from the public offering of common stock, net of issuance costs | — | — | 643.4 | |||||||
| Consideration to Former Parent in connection with the Separation | — | — | (1,950.0) | |||||||
| Net transfers to Former Parent | — | — | (116.5) | |||||||
| All other financing activities | (7.1) | (0.7) | (0.2) | |||||||
| Net cash (used in) provided by financing activities | $ | (465.6) | $ | 492.5 | $ | (107.7) |
Operating Activities
Cash flows from operating activities can fluctuate significantly from period-to-period for working capital needs and the timing of payments for income taxes, restructuring activities, pension funding and other items impacting reported cash flows.
Net cash provided by operating activities was $361.6 million during the year ended December 31, 2021 and $283.9 million in 2020. The increase was primarily due to higher net income, partially offset by lower cash provided by working capital and higher non-cash expense on a year-over-year basis.
Investing Activities
Cash flows relating to investing activities consist primarily of cash used for capital expenditures and acquisitions. Capital expenditures are made primarily for increasing capacity, replacing equipment, supporting new product development and improving information technology systems. Historically, capital expenditures generally have been made at relatively low levels in comparison to the operating cash flows generated during the corresponding periods, and usually range between 2.0% and 3.5% of net sales. These expenditures are expected to be financed with cash from operations and existing cash and cash equivalents.
Net cash provided by investing activities was $262.7 million during the year ended December 31, 2021, as compared to $69.1 million used in investing activities for the comparable period in 2020, primarily due to the proceeds from the sale of the Kavo treatment unit and instruments business.
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Financing Activities and Indebtedness
Cash flows relating to financing activities consist primarily of cash flows associated with debt borrowings, the issuance of common stock and transfers to Danaher prior to the Separation.
Net cash used in financing activities was $465.6 million during the year ended December 31, 2021, compared to $492.5 million provided by financing activities for the comparable period of 2020. In February 2021, we repaid $472.0 million of the Euro Term Loan Facility in connection with an amendment to the Credit Agreement. In March 2020, we borrowed the full amount available under the Revolving Credit Facility and repaid it in September 2020; and in May of 2020, we issued the Notes and received net proceeds of $502.5 million. In connection with the issuance of the Notes, we purchased the Capped Calls for $20.7 million.
For a description of our outstanding debt as of December 31, 2021 and the senior credit facilities, refer to Note 16 to our audited consolidated and combined financial statements in this Annual Report on Form 10-K.
We intend to satisfy any short-term liquidity needs that are not met through operating cash flow and available cash primarily through our revolving credit facility.
As of December 31, 2021, we had no borrowings outstanding under the revolving credit facility and we had the ability to incur an additional $750 million of indebtedness in direct borrowings under the revolving credit facility. As of December 31, 2021, we were in compliance with all of our debt covenants.
2020 Compared to 2019
Net cash provided by operating activities was $283.9 million during the year ended December 31, 2020 and $397.5 million in 2019. The decrease was primarily due to lower net income, changes in deferred taxes and accrued liabilities partially offset by improvements in working capital and higher non-cash expenses, including restructuring and impairment charges, on a year-over-year basis.
Net cash used in investing activities decreased by $9.3 million during the year ended December 31, 2020, as compared to the comparable period in 2019. The decrease was primarily due to lower purchases of property, plant and equipment and net proceeds from our cross-currency swaps, partially offset by the acquisition of Matricel in January 2020.
Net cash provided by financing activities was $492.5 million during the year ended December 31, 2020, compared to $107.7 million used in financing activities for the comparable period of 2019. During 2020, cash provided by financing activities was primarily due to the net proceeds received in connection with the issuance of the Notes in May 2020, partially offset by the purchase of the Capped Calls of $21 million. During 2019, we borrowed approximately $1.3 billion under senior credit facilities and received net proceeds of $643 million from the IPO. These proceeds were paid to Danaher as partial consideration for Danaher’s transfer of the assets and liabilities of its Dental business to us.
For a description of our outstanding debt as of December 31, 2020 and the senior credit facilities, refer to Note 16 to our audited consolidated and combined financial statements in this Annual Report on Form 10-K.
We intend to satisfy any short-term liquidity needs that are not met through operating cash flow and available cash primarily through our revolving credit facility.
As of December 31, 2020, we had no borrowings outstanding under the revolving credit facility and we had the ability to incur an additional $250 million of indebtedness in direct borrowings under the revolving credit facility. As of December 31, 2020, we were in compliance with all of our debt covenants.
Cash and Cash Requirements
Until the Separation, we were dependent upon Danaher for all of our working capital and financing requirements under Danaher’s centralized approach to cash management and financing of operations of its subsidiaries. For all periods prior to the Separation, other financial transactions relating to our business operations were accounted for through our former parent investment, net account.
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As of December 31, 2021, $1,073.6 million of cash and cash equivalents were held on deposit with financial institutions. Of this amount, $479.4 million was held within the United States and $594.2 million was held outside of the United States. We will continue to have cash requirements to support working capital needs, capital expenditures and acquisitions, pay interest and service debt, pay taxes and any related interest or penalties and fund our restructuring activities as required and support other business needs. We generally intend to use available cash and internally generated funds to meet these cash requirements, but in the event that additional liquidity is required, particularly in connection with acquisitions, we may need to enter into new credit facilities or access the capital markets. We may also access the capital markets from time to time to take advantage of favorable interest rate environments or other market conditions. However, there is no guarantee that we will be able to obtain alternative sources of financing on commercially reasonable terms or at all. See “Item 1A. Risk Factors—Risks Related to Our Business.”
While repatriation of some cash held outside the United States may be restricted by local laws, most of our foreign cash could be repatriated to the United States. Following enactment of the Tax Cut and Jobs Act of 2017 (“TCJA”) and the associated transition tax, in general, repatriation of cash to the United States can be completed with no incremental U.S. tax; however, repatriation of cash could subject us to non-U.S. jurisdictional taxes on distributions. The cash that our non-U.S. subsidiaries hold for indefinite reinvestment is generally used to finance foreign operations and investments, including acquisitions. The income taxes, if any, applicable to such earnings including basis differences in our foreign subsidiaries are not readily determinable.
As of February 15, 2022, we believe that we have sufficient sources of liquidity to satisfy our cash needs over the next 12 months and beyond, including our cash needs in the United States.
Purchase Obligations
The Company’s purchase obligations primarily consist of agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions and the approximate timing of the transaction. As of December 31, 2021, the Company had total purchase obligations totaling $98.7 million, all payable within 12 months.
For a description of our remaining contractual obligations, such as debt and leases see “Item 8. Financial Statements and Supplementary Data - Notes to Consolidated and Combined Financial Statements - Note 16 - Debt and Credit Facilities” and “-Note 8 - Leases.”
Off-Balance Sheet Arrangements
Guarantees and Related Instruments
The following table sets forth, by period due or year of expected expiration, as applicable, a summary of our off-balance sheet commitments as of December 31, 2021.
| Amount of Commitment Expiration per Period | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) | Total | Less Than One Year | 1-3 Years | 4-5 Years | More Than 5 Years | ||||
| Guarantees and related instruments | $68.5 | $57.4 | $6.7 | $3.6 | $0.8 |
Guarantees consist primarily of outstanding standby letters of credit and bank guarantees. These guarantees have been provided in connection with certain arrangements with vendors, customers, financing counterparties and governmental entities to secure our obligations and/or performance requirements related to specific transactions.
Other Off-Balance Sheet Arrangements
In the normal course of business, we periodically enter into agreements that require us to indemnify customers, suppliers or other business partners for specific risks, such as claims for injury or property damage arising out of our products or services or claims alleging that our products or services infringe third-party intellectual property. We have not included any such indemnification provisions in the contractual obligations table above. Historically, we have not experienced significant losses on these types of indemnification obligations.
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Debt Financing Transactions
On September 20, 2019, we entered into the Credit Agreement with a syndicate of banks, pursuant to which we borrowed approximately $1.3 billion as of the date hereof, consisting of a three-year, $650 million senior unsecured term loan facility and a three-year, €600 million senior unsecured term loan facility, which are referred to as the “Term Loans.” The Credit Agreement also includes a five-year, $250 million senior unsecured multi-currency revolving credit facility, which is referred to as the “Revolving Credit Facility.” Pursuant to the Separation Agreement, all of the net proceeds of the Term Loans were paid to Danaher as partial consideration for the Dental business that Danaher transferred to us.
The Credit Agreement requires us to maintain a Consolidated Leverage Ratio (as defined in the Credit Agreement) of 3.75 to 1.00 or less; provided that the maximum Consolidated Leverage Ratio will be increased to 4.25 to 1.00 for the four consecutive full fiscal quarters immediately following the consummation of any acquisition by us or any subsidiary of ours in which the purchase price exceeds $100 million. The Credit Agreement also requires us to maintain a Consolidated Interest Coverage Ratio (as defined in the Credit Agreement) of at least 3.00 to 1.00. Borrowings under the Credit Agreement are prepayable at our option at any time in whole or in part without premium or penalty. Term Loans may not be reborrowed once repaid. Amounts borrowed under the Revolving Credit Facility may be repaid and reborrowed from time to time prior to the maturity date. We have unconditionally and irrevocably guaranteed the obligations of each of our subsidiaries in the event a subsidiary is named a borrower under the Revolving Credit Facility. The Credit Agreement contains customary representations, warranties, conditions precedent, events of default, indemnities and affirmative and negative covenants, including covenants that, among other things, limit or restrict our and/or our subsidiaries’ ability, subject to certain exceptions and qualifications, to incur liens or indebtedness, merge, consolidate or sell or otherwise transfer assets, make dividends or distributions, enter into transactions with our affiliates, and use proceeds of the debt financing for other than permitted uses. The Credit Agreement also contains customary events of default. Upon the occurrence and during the continuance of an event of default, the lenders may declare the outstanding advances and all other obligations under the Credit Agreement immediately due and payable. The Company was in compliance with all of its debt covenants as of December 31, 2021.
Amendments to Credit Agreement
On May 6, 2020, we entered into the Amendment to our Credit Agreement that, among other changes, waives the quarterly-tested leverage covenant and reduces the interest coverage ratio to 2.00 to 1.00 through and including the first quarter of 2021. In connection with this Amendment, the lenders obtained a first priority security interest in substantially all of our assets. The Amendment also imposes limitations on liens, indebtedness, asset sales, investments and acquisitions. In addition, we are required to maintain a monthly-tested minimum liquidity covenant of $125.0 million during the waiver period. The Amendment increases the interest and fees payable under the Credit Agreement for the duration of the period during which the waiver of the debt covenants remains in effect. Substantially all terms of the Credit Agreement revert back to the original terms as soon as we submit a quarterly compliance certificate with debt covenants at pre-Amendment levels.
On February 9, 2021, we entered into an additional amendment to our Credit Agreement that substantially reinstated the original terms of our Credit Agreement effective February 9, 2021. In conjunction with this amendment, we repaid $472.0 million of our Euro Term Loan Facility, which was classified as short-term debt as of December 31, 2020 and submitted a quarterly compliance certificate as of December 31, 2020, which took into consideration the repayment of $472.0 million related to the Euro Term Loan.
On June 15, 2021, the Company entered into the Amended Credit Agreement which extended the maturity date of the Term Loans to September 20, 2024, increased the Revolving Credit Facility from $250.0 million to $750.0 million and reduce the floor on Eurocurrency rate loans applicable to the Revolving Credit Facility and the Term Loan Facility to zero.
Notes
On May 21, 2020, we issued the Notes due on June 1, 2025, unless earlier repurchased, redeemed or converted. The aggregate principal amount, which includes the initial purchasers’ exercise in full of their option to purchase an additional $68 million principal amount of the Notes, was $517.5 million. The net proceeds from the issuance, after deducting purchasers’ discounts and estimated offering expenses, were $502.6 million. The Notes accrue interest at a rate of 2.375% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020. The Notes have an initial conversion rate of 47.5862 shares of our common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $21.01 per share of our common stock and is subject to adjustment upon the occurrence of specified events. The Notes have customary provisions relating to the occurrence of “Events of Default” (as defined in the Indenture governing the Notes).
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Capped Call Transactions
In connection with the offering of the Notes, we entered into the Capped Calls with certain counterparties. The Capped Calls each have an initial strike price of approximately $21.01 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls have initial cap prices of $23.79 per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, 2.9 million shares of the Company's common stock. The Capped Calls are generally intended to reduce or offset the potential dilution from shares of common stock issued upon any conversion of the Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. The cost of $20.7 million incurred in connection with the Capped Calls was recorded as a reduction to additional paid-in capital.
Legal Proceedings
Please refer to Note 15 to our audited consolidated and combined financial statements included in this Annual Report for information regarding legal proceedings and contingencies, and for a discussion of risks related to legal proceedings and contingencies, please refer to “Item 1A. Risk Factors—General Risks.”